DBRS Confirms Ratings of European Residential Loan Securitisation 2016-1 DAC

DBRS Ratings Limited (DBRS) confirmed its ratings on the Class A, Class B and Class C Notes (Rated Notes) issued by European Residential Loan Securitisation (ERLS) 2016-1 DAC (the Issuer) as follows:

-- EUR 272,300,000 Class A Notes at A (sf)
-- EUR 12,300,000 Class B Notes at BBB (sf)
-- EUR 12,300,000 Class C Notes at BB (sf)

The confirmations reflect a stable cash flow performance since issuance in December 2016. The observed recoveries have exceeded DBRS initial expected recovery projections at the A, BB and B rating stress scenarios. The rating on the Class A Notes addresses timely payment of interest and ultimate payment of principal. The ratings on the Class B and Class C Notes address ultimate payment of interest and ultimate payment of principal. The Class P and Class D Notes are unrated.

ERLS 2016-1 DAC is a securitisation of a pool of Irish performing and non-performing residential mortgage loans. The mortgage loans were originated by Irish Nationwide Building Society (INBS) and are secured by Irish residential properties and a small proportion of non-Irish residential properties. The portfolio is 100% residential and static. The issuer may sell part of the portfolio subject to sale covenants. However, the sale price must be at least 85% of the aggregate current balance of the mortgage loans, which are subject to a sale.

At issuance, DBRS excluded 3.79% percent of the portfolio from the analysis. The excluded loans consisted of loans where enforcement procedures had been completed and a shortfall was realized as well as loans where administrative and/or security issues were identified and were not expected to be remedied within 12 months. Whilst collections received in respect of excluded loans will form available issuer funds and be applied in accordance with the relevant priority of payments DBRS did not consider potential recoveries from excluded loan in its analysis. Consequently, DBRS analysis is based on the total portfolio minus the excluded loans (Analysed Pool).

Based on the most recent investor report provided by the cash manager, the outstanding note balance was EUR 409.9 million on 30 September 2017. This balance represented a 23.5% reduction from the original balance of EUR 536.5 million at issuance. The Class B Notes will begin to amortise following the full repayment of the Class A Notes, which has an outstanding balance of EUR 156.3 million (as of 30 September 2017) and represents 57.4% of the original Class A balance at closing (or EUR 115.9 million reduction since closing). The principal note reduction is based on the interest principal collections received corresponding to the mortgage loans, recovery proceeds including funds received from a portfolio sale.

EUR 52.8 million has been repaid to the Class A Notes and EUR 10.5 million to the Class P Notes as a result of a portfolio sale of 448 loans. Amounts received in excess of 85% of the aggregate current balance of the mortgage loans following a portfolio sale will be applied as principal payments in the Class P Notes. Portfolio sale proceeds in excess of 75% (but not exceeding 85%) of the aggregate current balance of the sold mortgage loans, net of costs, are credited to the portfolio sale reserve.

The loan pool remains relatively granular. According to the investor report (as of 30 September 2017), the concentration of the top ten borrowers in the portfolio accounted for 7.7% of the outstanding balance compared to the 8.7% at closing . The current number of loans in the pool is 2,118, which was disbursed to 2,096 borrowers. The average loan balance is EUR 183,290. The weighted-average (WA) interest rate across the portfolio is 3.9% and interest-only loans represent 12.9% of the outstanding pool.

At issuance, 65.5% of the Analysed Pool was in various stages of the arrears/litigation process compared to 53.6% as of 30 September 2017. Since closing, the current performing status of loans has increased to 46.6% from 35.1%. At issuance, 13.7% reported of the Analysed Pool consisted of buy-to-let (BTL) loans. The recovery process associated with BTL loans is generally less intensive compared with mortgage loans associated with Primary Dwelling Housing (PDH) loans. In addition, a BTL property can be placed into receivership by the administrator. The current BTL loans accounted for 13.5% as of the September investor report. As of 30 September 2017, 24.6% (29.0% at closing) of the Analysed Pool had properties located in Dublin with the remaining 75.0% (71.0% at closing) of the Analysed Pool located in Non-Dublin regions. A small proportion of the Analysed Pool of approx. 0.3% has properties located outside of Ireland (0.5% at closing).

The WA pay rate at closing was calculated at 47.8% by DBRS for the Analysed Pool (46.39% when pay rates above 100% are capped to 100%). Based on an updated pool (as of 30 September 2017) provided by the cash manager, DBRS calculated a current WA pay rate of 48.0%. The DBRS stressed WA pay rates for this transaction at the assignment of the initial ratings at each rating stress levels are as follows:

--36.9% at A
--39.0% at BBB
--42.5% at BB
--46.3% at B.
The current reported WA pay rate of 47.8% is above all the rating level thresholds.

The cumulative principal collections reported since the first investor report as of November 2016 accounts for EUR 61.2 million. As reported in the cash manager report (as of 30 September 2017), the cumulative recoveries accounted EUR 39.7 million. The outstanding pool balance is equal to EUR 405,1 million (or EUR 388,1 million excluding the EUR 16.9 million of excluded loans) which represents 72.5% of the original EUR 558,0 million reported at closing.

The ratings are based on DBRS’s analysis of the projected collections and recoveries of the underlying mortgage portfolio; the historical performance and expertise of the servicer, Pepper Finance Corporation (Ireland) DAC (trading as Pepper Asset Servicing); the availability of reserves to cover interest shortfalls and expenses; the cap agreement with HSBC Bank USA, N.A; and the transaction’s legal and structural features. DBRS does not give credit on its analysis to portfolio sales.

The transaction benefits from an amortising reserve fund, which provides liquidity support and principal support at maturity to the Rated Notes. The reserve fund’s support to the Class B and Class C Notes is subject to performance-related triggers. The reserve fund has a target balance equal to 3% of the outstanding balance of the Rate Notes. The initial balance of the reserve fund was EUR 8.9 million and as of 30 September 2017 it stands at approximately EUR 5.6 million. The transaction also benefits from a portfolio sale reserve fund (PSR). The amounts available through the PSR provide liquidity support to the Rated Notes and will be utilised after amounts standing to the credit of the reserve fund. As of 30 September, the PSR balance is approximately EUR 6.9 million.

The transaction’s final maturity date is in 24 January 2059.

The sovereign rating of the Republic of Ireland remains the same at A (high)/R-1(middle) with Stable trends as of the date of this rating action.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Rating European Non-Performing Loans Securitisations”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include the Cash Manager (Citibank N.A, London Branch) and the Issuer Administration Consultant (Hudson Advisors Ireland DAC).

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

This is the first rating action since the Initial Rating Date.

The last rating action on this transaction took place on 2 December 2017, when DBRS assigned new ratings to the Class A, B and C Notes issued by ERLS 2016-1 DAC

The lead analyst responsibilities for this transaction have been transferred to Jorge Lopez Herguido.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

-The expected principal and interest collection in a rising interest scenario at A (sf) rating level, a 5% and 10% reduction in the expected collections.
-The expected principal and interest collection in a rising interest scenario at BBB (sf) rating level, a 5% and 10% reduction in the expected collections.
-The expected principal and interest collection in a rising interest scenario at BB (sf) rating level, a 5% and 10% reduction in the expected collections.

-DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would maintain the rating of Class A Notes at A (sf).
-DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would maintain the rating of the Class A Notes at A (sf).

-DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would maintain the rating of the Class B Notes at BBB (sf).
-DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would maintain the rating of the Class B Notes at BBB (sf).

-DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would maintain the rating of the Class C Notes at BB (sf).
-DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would maintain the rating Class C Notes at BB (sf).

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Jorge Lopez Herguido, Financial Analyst, Global Structured Finance
Rating Committee Chair: Vito Natale, Head of EU RMBS & CBs, Global Structured Finance
Initial Rating Date: 2 December 2016

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

--Rating European Non-Performing Loans Securitisations
--Rating European Consumer and Commercial Asset-Backed Securitisations
--Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
--European CMBS Rating and Surveillance Methodology
--Operational Risk Assessment for European Structured Finance Servicers
--Legal Criteria for European Structured Finance Transactions
--Derivative Criteria for European Structured Finance Transactions

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.